EU issues a record $1.45B fine to Intel over sales tactics

In a landmark ruling, the European Commission on Wednesday slammed chipmaker Intel with a record $1.45 billion fine for using illegal monopolistic practices..

The Commission found Intel guilty of using rebates to unfairly restrict computers equipped with microprocessors made by rival Advanced Micro Devices from reaching Europe.

Intel CEO Paul Otellini said the company would appeal. He issued a statement saying Intel "takes strong exception" to the ruling, but declined to discuss the rebates.

In the culmination of an investigation that began in 2000, regulators found nothing wrong with Intel offering rebates per se, says Gartner analyst Martin Reynolds. The sanction hinged on evidence that Intel threatened to withhold rebates from certain PC makers and retailers if they declined to shun computers using AMD chips. "The illegal practice wasn't reflected in any contracts," says Reynolds. "It was happening behind closed doors. The problem was the cover-up."

Intel's fine surpassed the $675 million penalty the Commission levied against Microsoft in 2004 for anticompetitive practices associated with distributing its Windows media player and Windows server in Europe. And last year the Commission hit Microsoft with a $1.2 billion fine for not fully complying with the 2004 decision. What's more, Microsoft remains under investigation for allegations that it uses illegal practices to distribute its Internet Explorer web browser in Europe.

In the Intel case, regulators ruled Intel's sales practices in Asia, where most PC manufacturers are located, were subject to European law, if the end result was fewer AMD products available to compete against Intel products in Europe.

AMD, which brought the original allegations, celebrated. "Intel broke the law and consumers were hurt," said Tom McCoy, AMD executive vice president for legal affairs. "With this ruling, European consumers will enjoy greater choice."

While the specific legal issues are different, Microsoft's ongoing, contentious dealings with European regulators suggests Intel faces a drawn-out battle. Both cases derive from Europe's belief in "ordoliberalism" — competition based on many firms competing against one another to serve the market, says Luke Froeb, a former Federal Trade Commission official.

"If you apply that vision to the chip industry you're going to come up with a very aggressive enforcement posture," says Froeb, who's now a professor at Vanderbilt University's Owen Graduate School of Management. "They'd rather have two chipmakers with higher costs, than one that can realize economies of scale."

Intel, based in Santa Clara, Calif., has about 80% of the world's personal computer microprocessor market and faces just one real rival, AMD, which has its headquarters just three miles from Intel in Sunnyvale, Calif.

The two companies have been fighting for years over what AMD says is Intel's intimidation of computer makers into striking exclusive deals for the chips they use in their new machines.

"AMD has consistently been a technology innovation leader and we are looking forward to the move from a world in which Intel ruled, to one which is ruled by customers," Meyer said in a statement.

Tom McCoy, AMD's executive vice president for legal affairs, said the ruling would bring consumers "greater choice, value and innovation."

Regulators said Intel also paid Germany's biggest electronics retailer, Media Saturn Holding, from 2002 to 2007 to stock only Intel-based computers at its MediaMarkt superstores, even in Dresden, Germany, where many AMD chips are made.

The decision does not affect Intel's pricing strategy outside Europe. But it could have an important effect in the United States and in Asia.

This week, one of the top U.S. antitrust officials, Christine Varney, signaled a return to trustbusting as the Obama administration dropped a strict interpretation of antitrust rules that saw regulators shun major action against alleged monopolies during the Bush years.

Kroes said Varney's words gave her hope that the EU's current "close cooperation" and information exchanges with the Federal Trade Commission "could go in a very positive way" in the future. The Federal Trade Commission upgraded a probe into Intel last year.

"The more competition authorities are joining us in our philosophy, the better it is for it is a global world," she said. "The more who are doing the job ... and with the same approach then the better it is."

Intel's Sewell said the concept that rebates could damage competition is an area "where the law is now in flux" and regulators were testing the boundaries.

"There is a line of thought developing primarily out of the European antitrust authorities but also perhaps being picked up by the Japanese and the Koreans that suggest that rebates can be anti-competitive," he said.

EU regulators said they calculated Intel's fine — 4% of last year's $37.6 billion in worldwide sales — on the value of its European chip sales over the five years and three months that it broke the law. Europeans buy some 30% of all computer chips sold every year.

The EU could have gone even higher. EU antitrust rules allow for a fine of up to 10% of a company's annual global revenue for each year of bad behavior.

The EU said the fine must be paid within three months. The money eventually goes into the EU budget, reducing the funding it seeks from European taxpayers.

European consumers group BEUC welcomed the fine and urged customers to seek damages in civil courts.

The EU said rebates like the ones Intel offered PC makers, with discounts for large orders, are illegal when a monopoly company makes them conditional on buying less of a rival's products or not buying them at all. EU officials said the discounts were so steep that only a competitor that sold chips for less than they cost to make would have any chance of grabbing customers.

According to regulators, AMD offered 1 million free chips to one manufacturer, but it ultimately could only accept 160,000 to avoid losing a rebate on many millions of other chips from Intel.